In: Accounting
Swathmore Clothing Corporation grants its customers 30 days’
credit. The company uses the allowance method for its uncollectible
accounts receivable. During the year, a monthly bad debt accrual is
made by multiplying 2% times the amount of credit sales for the
month. At the fiscal year-end of December 31, an aging of accounts
receivable schedule is prepared and the allowance for uncollectible
accounts is adjusted accordingly.
At the end of 2020, accounts receivable were $610,000 and the
allowance account had a credit balance of $74,000. Accounts
receivable activity for 2021 was as follows:
Beginning balance | $ | 610,000 | ||
Credit sales | 2,800,000 | |||
Collections | (2,663,000 | ) | ||
Write-offs | (57,000 | ) | ||
Ending balance | $ | 690,000 | ||
The company’s controller prepared the following aging summary of
year-end accounts receivable:
Summary | ||||
Age Group | Amount | Percent Uncollectible | ||
0−60 days | $ | 460,000 | 4 | % |
61−90 days | 78,000 | 15 | ||
91−120 days | 67,000 | 26 | ||
Over 120 days | 85,000 | 41 | ||
Total | $ | 690,000 | ||
Required:
1. Prepare a summary journal entry to record the
monthly bad debt accrual and the write-offs during the year.
2. Prepare the necessary year-end adjusting entry
for bad debt expense.
3-a. What is total bad debt expense for
2021?
3-b. How would accounts receivable appear in the
2021 balance sheet?
Q1.Journal entries to record the monthly bad debt accrual and the write-offs during the year:
Particulars | Debit amount($) | Credit amount($) |
1.Bad Debts expense a/c (2,800,000*2%) To Allowance for uncollectible accounts (Entry for monthly bad debts accrual) |
56,000 |
56,000 |
2. Allowance for uncollectible accounts To Account receivable a/c (Write offs recorded) |
57,000 |
57,000 |
Q2. Next, we need to record the necessary year-end adjusting entry for bad debt expense:
For that we need to calculate the bad debts expense amount:-
Age Group | Amount($)(a) | Percent Uncollectible(b) | Estimated bad debts(a*b)($) |
0−60 days | 460,000 | 4 | 18,400 |
61−90 days | 78,000 | 15 | 11,700 |
91−120 days | 67,000 | 26 | 17,420 |
Over 120 days | 85,000 | 41 | 34,850 |
Total | $690,000 | $82,370 |
Now, adjustment entry for bad debt expense-
Particulars | Debit amount($) | Credit amount($) |
1. Bad debts expense a/c (wn.1) To Allowance for uncollectible accounts ( Bad debts expense recorded) |
$9,370 |
$9,370 |
Working notes:-
1. Bad debts expense amount= Total Estimated bad debts- [ Credit balance of allowance account+ Bad debts accrual] + Write offs
=$82,370-[ $74,000+ $56,000]+ $57,000= $9,370
Q3. (a) We have to ascertain total bad debt expense i.e is equal to = $56,000+ $9,370= $65,370
(b) For this, we have to prepare the Balance sheet for 2021:
Swathmore Clothing Corporation Balance Sheet (2021) |
|
Current Assets: | |
Account receivable | $690,000 |
less:Allowance for uncollectible accounts | ($82,370) |
Net Account receivable- | $607,630 |